Types of Major

Accounts
The learners demonstrate an understanding
of the five major accounts, namely: assets,
liabilities, capital, income and expenses.
Define Assets, Liabilities, Owner’s Equity,
Income and Expense
Assets
•The resources owned and controlled by the
firm.
•Should be classified into two: current assets
and non-current assets
Liabilities
•Obligations of the firm arising from past
events which are to be settled in the future.
Income
•The increase in economic benefits during the
accounting period in the form of inflows of
cash or other assets or decreases of liabilities
that result in increase in equity. Income
includes revenue and gains.
Expenses
•Decreases in economic benefits during the
accounting period in the form of outflows of
assets or incidences of liabilities that result
in decreases in equity.
 Assets
• • Current Assets are assets that can be realized
(collected, sold, used up) one year after year-end date.
Examples include Cash, Accounts Receivable,
Merchandise Inventory, Prepaid Expense, etc.
• • Non-current Assets are assets that cannot be realized
(collected, sold, used up) one year after year-end date.
Examples include Property, Plant and Equipment
(equipment, furniture, building, land), long term
investments, etc.
 Assets
Current Assets Non-current Assets
• It expects to realize the asset, or • All other assets should be
intends to sell or consume it, in its classified as non-current
normal operating cycle. assets.
• It holds the asset primarily for the
purpose of trading.
• It expects to realize the asset w/in
12 months after the reporting
period.
• The asset is cash or cash
equivalent, unless the asset is
restricted from being exchanged
or used to settle a liability for at
least 12 months after the reporting
period.
 Assets
• • Tangible Assets are physical assets such as cash,
supplies, and furniture and fixtures.

• • Intangible Assets are non-physical assets such as

patents and trademarks
Assets
Note:
Operating Cycle – is the time between the acquisition of
assets for processing and their realization in cash or
cash equivalents.

When the entity’s normal operating cycle is not clearly

identifiable, it is assumed to be 12 months.
 Current Assets
• Cash is money on hand, or in banks, and other items
considered as medium of exchange in business
transactions.
• Cash Equivalents Per PAS No. 7, these are any short
term, highly liquid investments that are readily
convertible to known amount of cash
• Accounts Receivable are amounts due from customers
arising from credit sales or credit services.
• Notes Receivable are amounts due from clients
supported by promissory notes.
• Inventories are assets held for resale
• Supplies are items purchased by an enterprise which are
unused as of the reporting date.
Current Assets
• Prepaid Expenses are expenses paid in advance.
They are assets at the time of payment and
become expenses through the passage of time.
• Accrued Income is revenue earned but not yet
collected
• Short term investments are the investments
made by the company that are intended to be
sold immediately
 Non-current Assets
• Property, Plant and Equipment are long-lived
assets which have been acquired for use in
operations.
• Long term Investments are the investments
made by the company for long-term purposes
• Accumulated Depreciation It is a contra
account that contains the sum of the periodic
depreciation charges. The balance is deducted
from the cost of the related – equipment or
buildings – to obtain book value
 Non-current Assets
• Intangible Assets are assets without a
physical substance. Examples include
franchise and copyright.
Liabilities
 Liabilities
• Current Liabilities. Liabilities that fall due
(paid, recognized as revenue) within one year
after year-end date. Examples include
Accounts Payable, Utilities Payable and
Unearned Income.
• Non-current liabilities are liabilities that do
not fall due (paid, recognized as revenue)
within one year after year-end date. Examples
include Notes Payable, Loans Payable,
Mortgage Payable, etc.
 Current Liabilities

• Accounts Payable are amounts due, or

payable to, suppliers for goods purchased on
account or for services received on account.
• Notes Payable are amounts due to third
parties supported by promissory notes.
 Current Liabilities
• Accrued Expenses are expenses that are
incurred but not yet paid (examples: salaries
payable, taxes payable)
• Unearned Income is cash collected in
advance; the liability is the services to be
performed or goods to be delivered in the
future.
• Current portion of long term debt portions of
long term indebtedness which are to be paid
within one year from the balance sheet date.
 Non-current Liabilities

• Mortgage Payable – this account records long

tern debt of the business entity for which the
business entity has pledged certain assets as
security to the creditor.
 Non-current Liabilities

• Bonds Payable – The bond is a contract

between the issuer and the lender specifying
the terms of repayment and the interest to be
charged.
 Owner’s Equity

• Capital - is the value of cash and other assets

invested in the business by the owner of the
business.
- (from the Latin word capitalis meaning
“property”)
- this account is used to record the original and
additional investments of the owner of the business
entity.
 Owner’s Equity

• Withdrawals (Drawing) – When the owner of the

business entity withdraws cash or other assets,
such are recorded in the drawing or the withdrawal
account rather than directly reducing the owner’s
equity account.
 Owner’s Equity

• Income summary account- It is a temporary

account used at the end of the accounting period to
close income and expenses.
• This account shows the profit or loss before closing
to the capital account.
 Income
• the Increase in resources resulting from
performance of service or selling of goods.

1. Service income – revenues earned by performing

services for a customer or a client. Example:
laundry services, Accounting services by CPA
firms, etc.
2. Sales – Revenues earned as a result of sale of
merchandise. Example: sale of construction
supplies by a hardware
 Expense

• the decrease in resources resulting from the

operations of business
• Expenses decreases Equity in the accounting
equation
 Expense
• Cost of sales – the cost incurred to purchase or to
produce the products sold to customers during the
period; also called cost of goods sold.
• Salaries or Wages expense – Includes all payments
as a result of an employer – employee relationship
such as salaries or wages, 13th month pay, cost of
living allowances and other related benefits.
• Telecommunications, electricity, fuel and water
Expenses.– expenses related to use of
telecommunications, consumption of electricity,
fuel and water.
 Expense
• Rent expense– expense for space, equipment, and
other asset rentals.
• Supplies expense – Expense of using supplies (e.g.
office supplies) in the conduct of daily business.
• Insurance Expense – portion of premiums paid on
insurance coverage (on motor vehicle, life, fire,
typhoon or flood) which has expired.
 Expense
• depreciation expense– The portion of tangible asset
allocated or charged as an expense during
accounting period
• Uncollectible account expense – the amount of
receivables estimated to be doubtful of collection
and charged as an expense during the accounting
period.
• Interest Expense – An expense related to use of
borrowed funds.
Chart of Accounts.
Chart of Accounts.
• • A chart of accounts is a listing of the accounts
used by companies in their financial records.

• • The chart of accounts helps to identify where

the money is coming from and where it is going

• • The chart of accounts is the foundation of the

financial statements.
The following are the steps in the
preparation of a basic chart of accounts:
1. Create two columns.
2. Prepare the assets first, then liabilities, then
equity, then revenue and expenses.
3. List all assets, liabilities, equity, revenue and
expenses account in the first column.
4. On the second column, choose an account code
(discretion of the company).
5. On the third column, write the description for
each account on when to use it.
An example of a chart of accounts is given below:
An example of a chart of accounts is given below: